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France-Germany: comparative analysis of company insolvencies

GERMAN COMPANIES ARE MORE RESISTANT THAN THE FRENCH ONES. FOR HOW LONG?

Rate of French company insolvencies is nearly twice as high as that of German ones

German companies show strong resilience, in particular thanks to their robust financial health

Cost of insolvencies is higher in Germany than in France

The disturbing trend, observed during autumn 2012 about French company insolvencies, urged Coface economists to question themselves about the reasons which explain German companies’ resistance to the crisis.

Why are there less company insolvencies in Germany?

Since 2005, the curves of French and German company insolvencies are diametrically opposed. The difference amounts to nearly 40 % for the year 2011, on the whole, with 30,099 company insolvencies against 50,485 for France.
Germany owes its performance partly to the solidity of its entrepreneurial fabric: companies are, on average, larger than in France, therefore less exposed to the risk of default. The difference can be justified according to three other main factors:

The robust financial health of German companies, maintained by an increased profitability thanks to the moderation of costs and a strategy to move upmarket.

Financing of German companies (see graph 1) which resist well during periods of financial difficulty, thanks to a local banking sector made up of saving banks and credit unions. These are firmly anchored locally, have privileged relationships with companies and the stability of their financing allows them to compensate for the contraction of outstanding credit of commercial and national banks.

A German incentivized insolvency law, encouraging careful management of the companies upstream.

Graph 1- Financial situation of companies in Germany and France

Germany

France

2000

2011

2000

2011

Profit (% of GDP)

7.0%

10.3%

8.7%

6.8%

Self funding rate

60%

107%

85%

67%

Debts (% of GDP)

67%

77%

83%

103%

Gross profitability (EBE/Value added)

44%

49%

31%

30%

A fact: the cost of insolvencies is higher in Germany than in France

Company insolvencies are more expensive in Germany. In 2011, their total cost (*) reached 20 billion Euros against 14.3 billion in France. Furthermore, the average cost of an insolvency has, since 2006, been three times higher in Germany, standing at 700,000 constant Euros, against 200,000 in France.

However, this finding should be placed in context. In relative terms, the differential between the two countries is considerably less marked: in fact, the cost of insolvencies represent 0.8% of GDP in France against 1.1 % in Germany (see graph 2). In addition, while the average cost per insolvency is lower in France, this is also because French companies are on average smaller than their German counterparts: in 2007, companies with 10 to 249 employees represented 17.8% of the total companies in Germany, against only 6% in France. (*) Cost of insolvencies: the accumulation of each insolvent company.

The insolvencies in Germany are vulnerable to the vagaries of world trade commerce

Econometric analysis reveals that the evolution of insolvencies in Germany is very linked to the evolution of exports and investment. Now that exports showed certain signs of weakness over this summer and investment contracted over the second quarter, a return to increased insolvencies is to be watched for.
While Germany continues to be one of the best pupils in Europe, with an expected growth in GDP of 0.9% in 2012, its economy is suffering from the crisis. Growth slowed down in the first quarter (+0.3% in Q/Q, compared to + 0.5% in Q1). Furthermore expectations of production deteriorated over this summer: in September, the index of confidence of companies in the Institute of the German Economy (IFO) retreated for the fifth consecutive month. A market slowdown of foreign trade and notably of emerging markets would constitute the principal risk for German companies, which are highly dependent on demand from abroad. In fact, exports currently represent over 50% of German GDP and, historically, insolvencies appear to be very sensitive to their variations.